Four at Four: Losses Prime the Pumps for More Rallies

By David Gaffen

Valero shares shrugged off refining margin declines.

Celebrating bad news remains the default setting in markets, as a 2.9% bump in Valero Energy demonstrates. The refiner warned of worse-than-expected earnings results in the third quarter in part on declining margins, thanks to a sharp increase in crude oil costs without a concurrent rise in gasoline prices that would make refining more profitable. The futures markets can also be blamed for the losses. The company was hurt by the switch in the crude oil market from the condition known as contango, where the price of future contracts is higher than the current front-month, to backwardation, where the current contract is the one at the highest price. Since Valero, like some refiners, hedges against higher prices, it makes money when the future contracts are trading at a higher price. But it loses money when the future contracts fall below the current contract price — which is what happened in the last few months. The initial decline in shares was turned back, in part, by supportive comments from analysts like Goldman Sachs, which said “Despite the problems in the 3Q, “oil market conditions have otherwise turned decidedly bullish.” The ‘not a surprise’ element doesn’t apply to Chevron, however, which said refining and marketing earnings would fall sharply. But the company shocked some with $700 million in charges, and that, paired with production declines, smacked Chevron, which finished down 0.8%.

This is an earnings season? For the third consecutive day, volume on the exchange was anemic, and while MarketBeat is willing to concede Monday’s quasi-holiday as a mulligan, the 1.15 billion shares traded today, which follows Tuesday’s blockbuster 1.18-billion share day on the Big Board, is hardly impressing anyone. There hasn’t been a day with more than 1.3 billion shares since Oct. 1, and while trading on the New York Stock Exchange just isn’t what it used to be with the rise of electronic trading, this is still rather anemic. “It seems like it’s been quite a run-up and to buy an extended chart, you probably don’t want to be in there,” says Joseph Saluzzi, co-heads of equity trading, Themis Trading. “People keep waiting for the pullback which hasn’t come.” Today, however, the Dow did lose as much as 155 points, so even on a day with a decent turnaround, the volume was pretty low. Mr. Saluzzi was as exasperated as any, saying “I’m tired of a lot of people saying they’re waiting for something. What are you waiting for?”

Keep catching those passes, Plaxico. (NYGiants.com/Getty)

Perhaps the lack of trading has stirred up emotions among the floor brokers. The Big Board today said it suspended broker Stephen Mara for two weeks. If that last name seems familiar, it’s because Mr. Mara is a member of the family that has a partial ownership in the New York Football Giants (to use the old-fashioned moniker for the gridiron squad). And last December, he became incensed at another floor broker who mocked the recent performance of the Giants after they’d honked one against the Eagles, 36-22, and angrily pinned the broker against a post for several seconds. The Giants, who are 3-2 so far this year, better keep winning.

For a good lot of the year hedge funds have been playing catch-up with major market averages. But the garden-variety hedge fund has finally done so. After a stellar September that saw the Greenwich Hedge Fund Index rise 2.97%, the overall index is up 9.5% for 2007, ahead of the S&P 500′s 9.1% return. Not all classes are doing well, however, as the worst performers in August, including those who primarily trade in futures, along with arbitrage strategies, are still trailing major averages. Some analysts have attributed some of the recent rally to hedge funds looking to catch up to major averages, or improve upon those, as the goal of a hedge-fund manager isn’t generally to beat out the S&P 500 by a few tenths of a percentage point.

Comments (4 of 4)

People, wake up. It's all good while it lasts, just like a drunken orgy. Helicopter Ben is like that friend that pushes you to keep drinking well past your tolerance level. Just like Greenspan. There will be a time to pay for all this. Until then it's all good.

9:39 pm October 10, 2007

Bernanke = Greenspan wrote :

People, get a grip. Bernanke did the right thing in dropping interest rates to prevent the possibility of deflation and moving into recession. Better to nip that worry in the bud. It is also a good side effect to stabilize the credit markets with some cheaper cash. Bernanke is doing the same thing Greenspan did in 2002-2003, saving the economy from an unnecessary dip. Sustaining the upward march of stocks is also a good thing in my estimation. It's all good!

5:44 pm October 10, 2007

What a hell of an article! Now for the earnings report! wrote :

The U.S. commercial paper market is a vital capital pipeline for U.S. businesses, but it has been ravaged by the fallout from the subprime mortgage meltdown. Since ballooning to a record $2.225 trillion earlier this summer, the market has contracted at an alarming rate and has shrunk for an unprecedented seven straight weeks. As of Wednesday, the market’s overall size had fallen to $1.855 trillion, the smallest in more than a year. The market’s asset-backed segment, until recently accounting for more than half the market, has felt the worst of the pullback, shrinking by more than 22 percent since early August.

– Dan Burns

4:58 pm October 10, 2007

Spectator wrote :

Could the big board be a victim of Helicopter Ben's currency debasement? Perhaps the money is flowing overseas. What is the point of piddling gains in a depreciating currency. More interesting to play where your money will be worth something.

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